How Financial Planning for Business Can Help You
What is a financial plan? How do you make one and how does having one improve your business?
2019 saw a 15.6% decrease in the number of financial planners in Australia.
Perhaps you’re one of those business owners in need of a good plan. In this article, we’ll explain what a financial plan is and the steps you can follow to build your own.
What is a Financial Plan (And Why is it So Important)?
Business planning helps you create a forecast for the financial results you want to achieve in the future. The goal is to work out where you stand right now and how you can leverage that position to create future success.
This future focus means that business planning is a creative process, as well as an analytical one. It involves using the numbers that you have to create a vision for your future success, both in the short and long term.
Good financial planning for business is so important because it can accelerate your efforts. A well-laid plan should act as the blueprint for what you need to do to achieve results. It can help you see the best places to dedicate crucial business resources and help you to manage your expenses.
Ultimately, good planning means that you have stronger cash flow. This means you have more money available to invest in activities that create growth, such as sales and marketing.
Furthermore, a good financial planner can highlight issues that would harm your business. Once those issues are out in the open, you can work on resolving them, which helps to protect your business.
You just need to know how to create a good plan. The following four steps can help you set a course for your company’s financial future.
Step 1 – Calculate Your Costs
There are so many costs to consider when creating your plan.
For example, let’s assume that you’re just starting your business. This means you need to account for the costs related to acquiring an ABN. You’ll have various set-up costs for creating the company structure and finding suitable premises. You may also need to pay for equipment.
As you become more established, you’ll have more regular costs to contend with. These include salaries, utilities, and anything else you need to keep the business operational.
List every single business expense you can think of. Are they all necessary? You might discover some that you can eliminate at this stage.
Step 2 – Create a Cash Flow Forecast
With your expenses listed, you can start looking at expected sales. Your past sales figures can provide you with some guidance here. They’ll help you see what you can achieve if your business stays exactly the same as it is right now.
Use these figures, along with your expenses, to create profit and loss statements. Ideally, you’ll create monthly, quarterly, and yearly statements. This all acts as a gauge for the company’s future success.
Perhaps you’ll see that expenses will outweigh revenue for a particular month. If that’s the case, you may have to make a change in your business. Perhaps there’s an expense you could cut out or trim down. Maybe you need to set a higher sales target for the period in question. Or it may be time to change your pricing to better reflect the value that you offer your clients.
If you don’t have your own figures to work from, look at the industry benchmarks. Find out how other companies in your niche perform and create your forecasts based on those figures.
But your work doesn’t stop here.
You may have profits forecasted for every month in your profit-and-loss statements. However, this doesn’t necessarily mean that your business will always have available cash. For example, you may perform a service, but only receive payment several months after the sale. That means you risk going several months without money, even if you’re making sales.
The goal here is to project your cash flow for the next 12 months. Figure out how many sales you’re likely to make and when you’ll receive that money. This projection helps you to ensure that you always have money available when you need it.
Step 3 – Create Your Balance Sheet
A forecast balance sheet should cover three things:
- The fixed and current assets you expect to own after 12 months
- This includes equipment, property, cash, and inventory.
- Any liabilities you expect to have
- For example, a loan is a liability until you repay it. The same goes for accounts payable.
- Your own equity in the business
- These are the assets that belong to you as the business owner, rather than the business itself.
Your balance sheet can help you see if you have enough resources to keep the business running.
Step 4– Work Out Your Break-Even Point
With all your figures on the table, it’s time to work out your break-even point. This is the minimum amount of revenue your business must generate to cover your projected expenses.
Anything past the break-even point is profit.
Your break-even point helps you analyse your pricing, sales, and costs. The higher your break-even point, the more likely it is that you’ll need to make some changes to one of those things.
Is Financial Pl for Business Worth it?
It is, for many reasons.
Proper business planning helps you understand the financial health of your business. It can help you determine the viability of new ideas and existing strategies. Your financial plan may reveal areas of the business that you need to improve. And it can show you how to generate the cash flow needed to keep your business operational.
But perhaps you’re concerned about trying to create a plan on your own. If that’s the case, why not look into using a professional financial planner?
That’s where Modoras can help.
Get in touch with us today to arrange a consultation about the financial health of your business and your plans for the future.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (VIC) Pty Ltd ACN 145 368 850. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (VIC) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (VIC) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (VIC) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (VIC) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.